Hi, I am a bit unsure with this question : A company uses the formula (k.i’-i) to calculate savings profit, with a guarantee that k will be at least 80%. Why might the company actually distribute a savings profit calculated with a k of, say, 110%? The answer in the notes say: If earned i ́ is sufficiently below i, then this may be necessary just to produce a non-negative answer. A negative bonus would not be possible because this would undermine the guarantee implicit in the premium rates. What if the company uses k(i’-i) formula? And we have a negative answer because we made a loss on investments, does that mean there’s simply no savings bonus paid out? In the above question, are they referring to the scenario where we did in fact make a savings profit i’>i but after applying the k we get a negative answer? So we adjust k to make it positive?
Hi Y Chen Please can you give me a reference for this question. Where did you see it, eg chapter number and page number? Best wishes Mark
Hi Mark, this is from Question 10.3 in the South African F102 Acted notes. Additionally, can you please also explain this to me - I'm struggling to grasp the concept of this bonus method regarding increase in reserves, benefits and premiums by the same %? If a company is distributing bonuses from profit, why are they getting charged higher future premiums? would premiums and bonuses not partially offset to some extent? Thanks for your help
Hi Y Chen Thank you for the chapter reference. The F102 course is a little different to the SP2 course. Yes, we are just trying to make sure here that the result isn't negative. Rather than adjust k (which doesn't work for the second formula anyway), the insurer could just take the quoted formula subject to a minimum of zero. Best wishes Mark
Hi Y Chen Ignoring expenses, reserves are the present value of the benefits less premiums. So if the insurer has made a surplus and can afford to increase reserves by 5% say, then it can achieve this by increasing both the benefits and premiums by 5%. If we wanted to hold the premium constant then the benefit would have to increase by less than 5%. Best wishes Mark
